Building Financial Danger – September 9, 2016 Update

My overall analysis indicates a continuing elevated and growing level of financial danger which contains many worldwide and U.S.-specific “stresses” of a very complex nature. I have written numerous posts in this site concerning both ongoing and recent “negative developments.”  These developments, as well as other exceedingly problematic conditions, have presented a highly perilous economic environment that endangers the overall financial system.

Also of ongoing immense importance is the existence of various immensely large asset bubbles, a subject of which I have extensively written.  While all of these asset bubbles are wildly pernicious and will have profound adverse future implications, hazards presented by the bond market bubble are especially notable.

Predicting the specific timing and extent of a stock market crash is always difficult, and the immense complexity of today’s economic situation makes such a prediction even more challenging. With that being said, my analyses continue to indicate that a near-term exceedingly large (from an ultra-long term perspective) stock market crash – that would also involve (as seen in 2008) various other markets as well – will occur.

(note: the “next crash” and its aftermath has great significance and implications, as discussed in the post of January 6, 2012 titled “The Next Crash And Its Significance“ and various subsequent posts in the “Economic Depression” category)

As reference, below is a daily chart since 2008 of the S&P500 (through September 8, 2016 with a last price of 2181.30), depicted on a LOG scale, indicating both the 50dma and 200dma as well as price labels:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2142.11 as this post is written

Deflation Probabilities – September 8, 2016 Update

While I do not agree with the current readings of the measure – I think the measure dramatically understates the probability of deflation, as measured by the CPI – the Federal Reserve Bank of Atlanta maintains an interesting data series titled “Deflation Probabilities.”

As stated on the site:

Using estimates derived from Treasury Inflation-Protected Securities (TIPS) markets, described in a technical appendix, this weekly report provides two measures of the probability of consumer price index (CPI) deflation through 2021.

A chart shows the trends of the probabilities.  As one can see in the chart, the readings are volatile.

As for the current weekly reading, the September 8, 2016 update states the following:

The 2016–21 deflation probability was 10 percent on September 7, up from 9 percent on August 31. The 2015–20 deflation probability was 5 percent on September 7, unchanged from August 31. These 2015–20 and 2016–21 deflation probabilities, measuring the likelihoods of net declines in the consumer price index over the five-year periods starting in early 2015 and early 2016, are estimated from prices of the five-year Treasury Inflation-Protected Securities (TIPS) issued in April 2015 and April 2016 and the 10-year TIPS issued in July 2010 and July 2011.

I plan on providing updates to this measure on a regular interval.

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I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2181.65 this post is written

The September 2016 Wall Street Journal Economic Forecast Survey

The September 2016 Wall Street Journal Economic Forecast Survey was published on September 8, 2016.  The headline is “Why So Few Economists Are Prepared to Say Recession Risks Are Fading.”

I found numerous items to be notable – although I don’t necessarily agree with them – both within the article and in the “Economist Q&A” section.

An excerpt:

Kevin Hassett and Joseph Sullivan recently documented that the U.S. enters recessions about twice as frequently in the year after a presidential election compared with all other years. Five of the last 11 recessions landed in that window. The National Bureau of Economic Research has estimated recession dates back to 1854. In that period, 41% of recessions have fallen in the time window that only comprises 25% of months (the year after an election, of course, comes every fourth year).

As seen in the “Recession Probability” section, the average response as to the odds of another recession starting within the next 12 months was 20.25%. The individual estimates, of those who responded, ranged from 1% to 50%.  For reference, the average response in August’s survey was 20.95%.

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The current average forecasts among economists polled include the following:

GDP:

full-year 2016:  1.8%

full-year 2017:  2.2%

full-year 2018:  2.0%

Unemployment Rate:

December 2016: 4.7%

December 2017: 4.5%

December 2018: 4.5%

10-Year Treasury Yield:

December 2016: 1.75%

December 2017: 2.29%

December 2018: 2.70%

CPI:

December 2016:  1.6%

December 2017:  2.2%

December 2018:  2.2%

Crude Oil  ($ per bbl):

for 12/31/2016: $47.02

for 12/31/2017: $53.29

for 12/31/2018: $56.78

(note: I highlight this WSJ Economic Forecast survey each month; commentary on past surveys can be found under the “Economic Forecasts” category)

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2181.91 as post is written

Chicago Fed National Financial Conditions Index (NFCI)

The St. Louis Fed’s Financial Stress Index (STLFSI) is one index that is supposed to measure stress in the financial system.  Its reading as of the September 8, 2016 update (reflecting data through September 2) is -1.123.

Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources.

Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).

Here are summary descriptions of each, as seen in FRED:

The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.

The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.

For further information, please visit the Federal Reserve Bank of Chicago’s web site:

http://www.chicagofed.org/webpages/publications/nfci/index.cfm

Below are the most recently updated charts of the NFCI and ANFCI, respectively.

The NFCI chart below was last updated on September 8, 2016 incorporating data from January 5,1973 to September 2, 2016, on a weekly basis.  The September 2, 2016 value is -.63:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed September 8, 2016:

http://research.stlouisfed.org/fred2/series/NFCI

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The ANFCI chart below was last updated on September 8, 2016 incorporating data from January 5,1973 to September 2, 2016, on a weekly basis.  The September 2 value is .23:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed September 8, 2016:

http://research.stlouisfed.org/fred2/series/ANFCI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2183.42 as this post is written

September 6, 2016 Gallup Poll Results On Economic Confidence – Notable Excerpts

On September 6, 2016 Gallup released the poll results titled “U.S. Economic Confidence Up in August as DNC Rally Persists.”

Notable excerpts include:

The Gallup U.S. Economic Confidence Index rose to a five-month high of -11 in August, up from -15 in July. This month's four-point gain notwithstanding, the index remains well below its post-recession high of +3 in January 2015 and is one point below this March's -10, the monthly high for 2016.

also:

Gallup's U.S. Economic Confidence Index is the average of two components: how Americans rate current economic conditions and whether they feel the economy is improving or getting worse. The index has a theoretical maximum of +100 if all Americans say the economy is doing well and improving, and a theoretical minimum of -100 if all Americans say the economy is doing poorly and getting worse.

In August, 27% of U.S. adults described the current conditions of the economy as "excellent," or "good," while 29% said conditions were "poor," yielding a current conditions index score of -2. This is up slightly from a current conditions score of -5 in July.

The economic outlook index rose in August to -19 from July's -24. The August outlook score reflects the 38% of Americans who said the economy was "getting better" and the 57% who said it was "getting worse."

Here is an accompanying chart of the two components of the Gallup Economic Confidence Index, discussed above:

Here is an accompanying chart of the Gallup Economic Confidence Index:

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2182.95 as this post is written

Recession Probability Models – September 2016

There are a variety of economic models that are supposed to predict the probabilities of recession.

While I don’t agree with the methodologies employed or probabilities of impending economic weakness as depicted by the following two models, I think the results of these models should be monitored.

Please note that each of these models is updated regularly, and the results of these – as well as other recession models – can fluctuate significantly.

The first is the “Yield Curve as a Leading Indicator” from the New York Federal Reserve.  I wrote a post concerning this measure on March 1, 2010, titled “The Yield Curve as a Leading Indicator.”

Currently (last updated September 6, 2016 using data through August) this “Yield Curve” model shows a 9.2073% probability of a recession in the United States twelve months ahead.  For comparison purposes, it showed a 9.8505% probability through July, and a chart going back to 1960 is seen at the “Probability Of U.S. Recession Predicted by Treasury Spread.” (pdf)

The second model is from Marcelle Chauvet and Jeremy Piger.  This model is described on the St. Louis Federal Reserve site (FRED) as follows:

Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model was originally developed in Chauvet, M., “An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching,” International Economic Review, 1998, 39, 969-996. (http://faculty.ucr.edu/~chauvet/ier.pdf)

Additional details and explanations can be seen on the “U.S. Recession Probabilities” page.

This model, last updated on September 1, 2016, currently shows a .38% probability using data through June.

Here is the FRED chart (last updated September 1, 2016):

Data Source:  Piger, Jeremy Max and Chauvet, Marcelle, Smoothed U.S. Recession Probabilities [RECPROUSM156N], retrieved from FRED, Federal Reserve Bank of St. Louis, accessed September 6, 2016:

http://research.stlouisfed.org/fred2/series/RECPROUSM156N

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The two models featured above can be compared against measures seen in recent blog posts.  For instance, as seen in the August 11 post titled “The August 2016 Wall Street Journal Economic Forecast Survey“ economists surveyed averaged a 20.95% probability of a U.S. recession within the next 12 months.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2186.48 as this post is written

2016 & 2017 Estimates For S&P500 Earnings & Price Levels

In the September 5, 2016 edition of Barron’s, the cover story is titled “Beware the Bear.”

Included in the story, 10 investment strategists give various forecasts for 2016 and 2017 including S&P500 profits, S&P500 year-end price targets, GDP growth, and 10-Year Treasury Note Yields.

Two excerpts from the article:

Their mean expectation for the Standard & Poor’s 500 index is 2138 at year end, below Friday’s close of 2180. Four strategists call themselves bullish, three are in the bear camp, and three are neutral.

also:

The average of strategists’ earnings-per-share estimates for the companies in the S&P is about $119 in 2016, down from a projected $123.50 last December and $129 in September 2015. That isn’t very different from the bottom-up industry analysts’ consensus of about $118, which is down from $132 some 12 months ago.

Of the eight strategists who provided 2017 S&P500 earnings estimates, the average is $125.88.   The article also mentions that among the investment strategists, average expected 2016 GDP growth is 1.7% and 2.0% (from nine strategists' forecasts) in 2017.

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2186.48 as this post is written

“Not In Labor Force” Statistic – As Of September 2016

In the November 13, 2013 post (“Not In Labor Force Statistic“) I featured editorial commentary from the Wall Street Journal, as well as an accompanying long-term chart, with regard to the number of people not working.

Also, on February 9, 2015 I wrote another post titled “Unemployment And The ‘Not In Labor Force’ Statistic,” in which I discussed various facets of this measure.

Below is an updated chart regarding this statistic.  The current figure, last updated on September 2, 2016 depicting data through August 2016, is 94.054 million people (Not Seasonally Adjusted):

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Not In Labor Force [LNU05000000] ; U.S. Department of Labor: Bureau of Labor Statistics; accessed September 6, 2016;

http://research.stlouisfed.org/fred2/series/LNU05000000

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2179.98 as this post is written